Italian Bank Profit May Rise on New Loan-Loan Provisions

Profit at Italian banks may rise with a government proposal to ease the tax treatment of lenders’ loan-loss provisions, brokerage firms Mediobanca Securities and Banca IMI SpA said.

Italy’s Cabinet on Oct. 15 approved a measure to allow banks greater deductions for loan losses against their regional tax bills, known as IRAP, Finance Minister Fabrizio Saccomanni told reporters in Rome today. The measure is part of of the country’s 2014 budget law that must be passed by the Italian Parliament by the end of the year.

Saccomanni declined to provide details on the measure and its impact on the budget.

“If finally confirmed, the deductibility of loan-loss provisions from the IRAP taxable income would have a significant positive impact on the P&L of Italian banks,” Manuela Meroni, an analyst at Banca IMI, wrote in a note today. Banca Monte dei Paschi di Siena SpA, Unione di Banche Italiane SCPA and Banco Popolare SC would be “the most positively impacted,” she said.

Under the current law, loan losses are included in the taxable income to calculate the regional tax, which on average reduces banks’ revenue, net of amortization and administrative expenses, by about 5 percent.

Last year, Italian lenders set aside about 24 billion euros ($33 billion) for bad loans, according to Bologna, Italy-based research firm Prometeia, an amount that would lower regional tax payments by more than 1 billion euros under the proposed rules. In 2012, Unione di Banche Italiane SCPA, Italy’s fourth-largest bank, paid more than 47 million euros in regional taxes on its loan-loss provisions, according to its annual report.

Profit Up

“We calculate the earnings impact of the newly proposed IRAP regime could on average” boost 2014 earnings by 7 percent for the Italian banks Mediobanca covers, Riccardo Rovere, an analyst at the firm, wrote in a note today. The tax may lift profit by 5 percent, according to Matteo Ghilotti, an analyst at Equita Sim.

In 2015, the potential positive impact on banks’ net income would be 11 percent, Banca IMI’s Meroni wrote. Rovere put it at 5 percent.

The Cabinet also reviewed changes in the fiscal treatment of loan losses for another corporate tax known as IRES, according to a preliminary draft. The proposal calls for shortening the period for deduction of impairments from taxable income to five years, from 18 years.

The proposed changes “would encourage lenders to clean up balance sheets, lower impaired loan ratios and improve coverage over time,” Fitch Ratings said in an e-mailed statement today. “The new tax treatment may aid Italian banks’ asset quality,” improving the comparability with European peers, it said.

Italy plans to raise 2.2 billion euros from the revision of accounting treatment of banks, insurers’ losses, according to a government statement on Oct. 15.

(Updates with finance minister confirmation in second paragraph, government proposal in ninth, Fitch comment in 10th.)
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